Comments on: You’re on your own, kids http://blogs.reuters.com/james-saft/2011/06/07/youre-on-your-own-kids/ Tue, 24 Mar 2015 16:54:45 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: richwell http://blogs.reuters.com/james-saft/2011/06/07/youre-on-your-own-kids/comment-page-1/#comment-691 Fri, 10 Jun 2011 05:32:18 +0000 http://blogs.reuters.com/jim-saft/?p=445#comment-691 “For equities and other risk assets it will be, of course, bad. It will take a while for the new reality to sink in, but when it does look for conditions that are just bad enough to bring consensus on rescues, stimulus and extraordinary measures yet unimagined.”

Jim,
Restoring health of the US housing market has lately been mentioned by many analysts as the missing piece in putting together a bona fide recovery.

For over two years there has been a tug of war between the market fundamentalists who would have foreclosures proceed with abandon and those who have various concerns for the social and economic consequences of unlimited foreclosure.

In the next six months as the current foreclosure lull abates, we should probably see a harbinger in some “market-friendly” states of what may await the US economy.

Perhaps then the “consensus on rescues, stimulus and extraordinary measures” you suggest will emerge.

I suggest the following:
Using funding from settlements with servicers, USG sets up a monumental database for the following:
1) clean up toxic housing securities on balance sheets by using data from multiple sources to model individual mortgage performance
2) offer principal reduction to eliminate underwater mortgage balances through a private intermediary to overcome Congressional obstruction. Funds would be QE3 from Fed by purchase of intermediary’s securities. This reduction would be a recourse loan from intermediary, so serious incentives would be offered homeowners to enter this principal reduction program.

This program would result from USG global agreements with servicers and debtholders to give USG proxy to execute modifications and substitution by novation of homeowners and their mortgages so that people could end up in affordable homes and mortgages in localities with jobs while avoiding foreclosure and mitigating credit damage. This proxy would be logical as USG is in effect already guarantor of most mortgages.

Private intermediary and in turn the Fed could accomodate foregiveness of some principal reduction loans resulting from mortgages arising at height of the bubble in 2004-7 as a way of fighting deflation. Perhaps Fed could simply erase this loss on such securities together with corresponding reserve creation. This would literally be “printing money” and a more targetted use of QE3.

Full details available in a paper from rnwelle@attglobal.net

]]>
By: CDN_Rebel http://blogs.reuters.com/james-saft/2011/06/07/youre-on-your-own-kids/comment-page-1/#comment-690 Wed, 08 Jun 2011 20:06:20 +0000 http://blogs.reuters.com/jim-saft/?p=445#comment-690 The FED chose the Japan model (albeit a quicker response time) to try and solve the problem of the last recession… why is it so unreasonable to expect that the solution plays out along the same proportional time frame? Given that Japan still has no solution after nearly 25 yrs how is it that America will suddenly come up with the right answers? There are answers, but no political will to implement them… only half-measures from the body politic and push back on those from the wealthy. I think it would take Saudi’s saying ‘we won’t advocate for cheaper oil anymore unless you get your act together’ to really effect chance in America… until then expect at least 10 yrs of Kabuki

]]>
By: Ananke http://blogs.reuters.com/james-saft/2011/06/07/youre-on-your-own-kids/comment-page-1/#comment-689 Tue, 07 Jun 2011 19:32:11 +0000 http://blogs.reuters.com/jim-saft/?p=445#comment-689 …Or, there is another choice – FED does nothing and lets the investors slowly bear the loss. The private markets may lose 30-50% over the next decade, but it is still better than 70% overnight in 2008.

Although, I would say we are facing a generation or two of slow materialization of equity loss – i.e. releasing the steam of the markets…around 25-30 years.

]]>
By: Ananke http://blogs.reuters.com/james-saft/2011/06/07/youre-on-your-own-kids/comment-page-1/#comment-688 Tue, 07 Jun 2011 19:32:08 +0000 http://blogs.reuters.com/jim-saft/?p=445#comment-688 …Or, there is another choice – FED does nothing and lets the investors slowly bear the loss. The private markets may lose 30-50% over the next decade, but it is still better than 70% overnight in 2008.

Although, I would say we are facing a generation or two of slow materialization of equity loss – i.e. releasing the steam of the markets…around 25-30 years.

]]>
By: NukerDoggie http://blogs.reuters.com/james-saft/2011/06/07/youre-on-your-own-kids/comment-page-1/#comment-686 Tue, 07 Jun 2011 18:42:24 +0000 http://blogs.reuters.com/jim-saft/?p=445#comment-686 James, at what point does the dollar-favorable investor psychology change? I mean, Mohamed El-Erian of PIMCO recently compared those holding dollar investments (like Treasuries) to the proverbial frog that is getting boiled alive, albeit slowly.

“Risk” is relative. If the U.S. and Europe soon descend into a second recession that is uglier than the last one (as is very likely), then real fears over sovereign defaults will rise. Relative to the emerging economies whose finances are massively in-the-black, the dollar and Treasuries will look pretty risky then. In fact, even in the crisis of 2.5 years ago, global investors piled mostly into short-dated Treasuries for a safe haven. I read that as evidence that investors have profoundly serious doubts about the dollar beyond the short term. Those fears are, if anything, worse now, 2.5 years later when the U.S. is on the verge of another recession and crushed by a mountain of debt, with no way out but are strategic weakening of the currency or even a default.

So I think your analysis is quite a bit too simplistic. I think the prognosis for the dollar is awful beyond the very short term, and if the U.S. soon suffers another recession it will be extremely disruptive and will eventually drive investors into non-dollar assets. Their traditional risk assessment psychology is already being incrementally rewritten, though they may not realize it fully yet.

The dollar ceases to be the safe haven when investors finally come to realize the U.S. is already profoundly stuck with two bad choices – weaken the currency strategically, and/or default on some debt. No one believes any longer that the U.S. will succeed in getting its financial house in order. And if the impending deep recession materializes, it will be the last straw that breaks the back of traditional, dollar-favorable risk assessment psychology.

]]>